Is The Summer Rally In Jeopardy?

The Dow and the S&P 500 were both off 1%, with financials leading the market lower as stocks fell ahead of tomorrow’s Fed statement, the bulls waited on the sidelines. Other big movement of the day included energy and technology slipping to the downside, while the market’s volatility was up on the day.

With the markets down for a second consecutive day, it’s got insiders thinking that stocks may have a pullback in their future. If these fears are founded, is this the end of the month-long summer rally?

The markets experienced a broad-based sell-off on Tuesday that has traders wondering whether this is a pause in the market momentum or whether this summer rally is really in jeopardy. “I think the market is headed lower,” says Guy Adami, who points out that the market is behaving differently than it did the past few weeks, when it sold off and then rallied into the end of the day. Instead, he says, this week the market has been selling off near the end of the trading session and the technicals point to the market moving lower.

However, Tim Seymour sees the landscape a little differently. “The technicals tell you we’re right back to where we were before that non-farm payroll number,” he explains. It’s been dangerous to buy into pullbacks this week, as they have been shallow and it’s an easy way to lose money, he says.

On Monday’s show, Pete Najarian highlighted the extremely low volume in options trading, but today traders saw a little rebound in options volume. He says it’s a result of panic back in the market, pointing out that people were scrambling for downside puts on a day where the market’s volatility was on the rise. “It wasn’t an outright panic,” he said “but they were certainly looking for some options today.”

”A little retracement is nothing at all” adds Karen Finerman, “a little pullback might even be healthy.” In order for the markets to become more attractive, she’d like to see some more positive data, as the market has already priced in the existing positives. She half-jokingly suggests Congress being out of session is one of the best things the market has going for it right now.

Market's Major Laggard: Financials

On a down day, the sector feeling the worst of the session's pain was financials, with Wells Fargo and Citigroup among the major names losing ground in part after Dick Bove predicted a less-than-rosy picture for bank earnings in the rest of 2009. But are there still buying opportunities?

Tim Seymour sees the sector as a whole being very “tired” after its month-long run in addition to facing speculation that mark-to-market rules may be changing again. “There is a lot of news about the banks out there when we don’t even know if earnings are normalized,” he says. Seymour likes JPMorgan right now, which he sees as turning the corner on its consumer-related portfolio.

”Wells Fargo has been a fascinating stock,” says Guy Adami, who notes the pullbacks and rallies the stock has experienced. He’s also heard murmurings suggesting the possibility that WFC could be looking to do a secondary offering, although at this point they are simply rumors. Adami sees both Wells Fargo and the entire financial sector as a short, although he admits that is a dangerous trade. He suggests shorting individual financial stocks with tight stops.

After Hours Action: Applied Materials

Applied Materials reported better-than-expected earnings after Tuesday’s closing bell, which pushed the stock higher in after-hours trading. CNBC’s Jim Goldman reports an “optimistic tone” from the company with a “strong surge in revenues” to the tune of a 10-20% increase for 4th quarter guidance. The company also expects to reach a break even point by the 4th quarter, and cites the possibility of a $0.04 EPS by the end of the year, compared to an expected $0.04 loss. Increases in orders and the company’s solar business were the bright spots in the report.

On the back of this news, Tim Seymour sees the possibility of a bump for solar stocks after AMAT’s positive report. He would look to Chinese and European solar companies, whose countries are expanding solar capacity and AMAT’s success could bode well for the future of these companies. Some of these companies will report earnings this week, but Pete Najarian wouldn’t go so far as to make big trades prior to their reports.

Health Care Backlash and Profits

Health Care reform is at the forefront in the American political sphere, and the back-and-forth has pushed the stocks of health insurers like UnitedHealth Group upwards, the stock beating the levels of the S&P over the past 5 trading days. The insurers are advancing on the hopes that the health care reforms will be significantly modified, which could bode well for the companies’ bottom lines.

"I’m a little concerned about this space," says Karen Finerman, who cut loose her HMO exposure earlier this year on concerns that the Obama administration would hurt their operations.

Pete Najarian sees the trade to make in health care to be in the generics, highlighting Teva Pharmaceuticals, with “incredible” numbers last quarter and projections of 35% growth in the future. He likes where the company is going and sees the company as a “good buy” regardless of how Obama’s healthcare plan plays out.

For more analysis on how discount retailers like Target and Wal-Mart are outperforming the market and how Karen Finerman is playing them, check back for the video!

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